A 30-30-30 phenomenon shows the stark contrast between the importance of companies engaging with the world around them and their failure to do so successfully. On average, 30% of corporate earnings are at stake from a company’s relationship with external stakeholders such as regulators and NGOs, according to research by McKinsey. CEOs say they spend 30% of their time addressing how their companies engage with these stakeholders. Yet, less than 30% of CEOs believe their companies engage successfully.
Traditionally, companies have relied on Corporate Social Responsibility (CSR) as a primary means of governing their relationships with society, yet CSR departments have become increasingly detached from core commercial activity. As Enron’s excellent CSR record showed, a great CSR program is no guarantee that a company’s business operates in the interest of society. During my tenure as CEO of BP, I was an early proponent of CSR, but I think that the idea of connecting with society in this way is now dead.
1 GET RADICAL ABOUT ENGAGEMENT
In its place, CEOs need to find ways to integrate societal and environmental issues deeply into their companies’ strategy and operations. Business needs to become more inclusive of all relevant internal and external stakeholders, engaging radically with people outside the company, on their agenda, not its own.
To embed this new approach within the company, business leaders will need to drag the management of environmental and social issues into the professional era. Bloomberg Chairman Peter Grauer, shares this view. In one of the 80 CEO interviews that my collaborators and I recently conducted, he told us that the “traditional approach to managing this part of enterprise needs a dramatic overhaul. This is likely to become a key differentiator as the pressures on business increase.”
In my view, capturing the 30% value at stake must begin with a fundamental re-appraisal of the role of the CEO. The requirements for the top job have changed. Sam Palmisano, who led IBM from 2002 to 2012, believes his time at the helm coincided with a palpable shift in the criteria used to evaluate CEOs. “It was shareholder value creation, pure and simple,” says Palmisano. He reflects on the “very straightforward measure” of performance by which some of the great CEOs who came before him—IBM’s Lou Gerstner at IBM, GE’s Jack Welch, Emerson’s Chuck Knight—were measured. “People looked past how they got there.”
Lee Scott, Walmart’s CEO during the same era, agrees. “Someone like Jack Welch was able just to get up in the morning and drive through the things he felt were best for GE,” he says. “In those days you acted in the best interests of your investors and your customers and you really did not need to worry too much about the outside world looking in.”
Today, however, most CEOs agree that the job is harder than it has ever been. As Scott points out, the CEO’s audience “is not just your customers and your employees, it’s the entire world.” Even in the narrow sphere of financial performance, the judgements are harsher. “Look at Tim Cook of Apple,” says Scott. “Here is a guy who is increasing revenues, increasing profits, creating new products and maintaining a brand that is universally adored. Yet he faces the most intense criticism on an almost daily basis.”
2 IDENTIFY WHAT’S IMPORTANT
People now demand that companies deliver across a much wider range of societal issues. What’s more, after understanding these new expectations, the second thing CEOs must do is think about whether their company is addressing the issues that will allow it to continue to grow in the long run.
The goalposts were already shifting when I was CEO of BP. Financial performance was no longer enough; companies increasingly needed to demonstrate their positive impact on society. It led me to make a landmark speech on climate change at Stanford in 1997, arguing that the link between climate change and fossil fuel emissions could no longer be ignored.
I could see that addressing these environmental issues head on was the only way to secure BP’s future. It was the only way for the company to gain a seat at the negotiating table when the future of the industry was being discussed, to show customers that we were planning for change and to convince talented young people with a vision for the future that they should work for us. It challenged BP and the wider oil and gas industry to think about how to take our business “Beyond Petroleum.”
Palmisano notes that in the current business environment, hitting financial targets is “not going to get you more than a B minus when people grade you as a CEO.” Instead, “you have to define your mission as a CEO and as a company in much broader terms. That’s what drove me, and it will only become more important for the next generation.”
Research by Edelman further supports this case: in recent years, society has reduced the emphasis it places on financial performance as an indicator of good business. In 2008, operational excellence (including investor returns) remained the primary driver of corporate reputation among the general public. Six years later, it was the least important of the five ‘trust performance clusters’ that Edelman cites (the others being engagement, purpose, integrity and products and services).